It’s now officially been 10 years since the government took Fannie Mae and Freddie Mac into conservatorship. And in that decade, an uneasy status quo has developed with Fannie and Freddie dominating the housing finance system, despite their limited capital bases and unresolved position as wards of the federal government.
But if House Financial Services Committee Chairman Jeb Hensarling, R-Texas, has anything to say about it in his final days in office, all of that uncertainty will soon be resolved.
Hensarling, long an advocate for reforming the country’s housing finance system, announced Thursday that he plans to introduce two major housing finance reform bills, both of which would upend Fannie and Freddie’s place in the market and work to bring private capital back into the market.
The efforts will hardly be Hensarling’s first at reshaping housing finance. In fact, one of the bills Hensarling plans to put forward is one he previously introduced several years ago, the Protecting American Taxpayers and Homeowners Act (or PATH Act).
The PATH Act was originally introduced in 2013 and worked its way through the House of Representatives, as two competing bills (the Corker-Warner and Johnson-Crapo bills) moved through the Senate.
None of those bills ever became law, but Hensarling said Thursday that he plans to reintroduce the PATH Act, despite knowing it has little chance of passing.
“For almost 20 years, I along with a handful of reformers like Congressman Ed Royce have labored in vein to replace the GSEs' government-sanctioned monopoly with a new system based on competitive private capital, innovation, consumer choice, and market discipline,” Hensarling said in Thursday’s House hearing on the 10-year anniversary of Fannie and Freddie being taken into conservatorship.
“We passed the PATH Act in the 113th Congress to do just that,” Hensarling said. “I am reintroducing the PATH Act this week, and for no other reason it is the right thing to do and it will let me sleep better at night. Regrettably, its chances for passage remain slim.”
Given the PATH Act’s “slim” change of passing, Hensarling also plans to introduce a separate bill that would repeal Fannie and Freddie’s charters and drastically elevate the role of Ginnie Mae in the housing finance system.
What makes this bill interesting is that Hensarling plans to introduce it in partnership with several Democrats.
“So as an alternative, I’ve decided to partner with Mr. Delaney on the other side of the aisle to propose a bipartisan compromise housing reform plan that preserves the government guarantee in the secondary mortgage market,” Hensarling said. “In the time I have remaining in Congress, this is the plan I will pursue.”
The Delaney that Hensarling is referring to is Rep. John Delaney, D-Maryland, who has also worked for several years on reforming the housing finance system. Back in 2014, Delaney introduced legislation that would have broken up Fannie Mae and Freddie Mac.
Neither Delaney nor Hensarling is planning to run for Congress again, meaning they plan to use their remaining time to push for this housing finance reform effort.
Hensarling announced last year that he would not be pursuing re-election (although there have been rumors that he might slide into a role in the Trump administration), while Delaney announced last year that he is not running for Congress because he is running for President in 2020.
Despite those divergent career paths, Delaney and Hensarling are joining together to pursue housing finance reform. Also joining them in introducing the bill is Rep. Jim Himes, D-Connecticut.
The plan, called the “Bipartisan Housing Finance Reform Act,” would bring massive changes to the mortgage market.
This is how Hensarling described it on Thursday:
Our discussion draft, which we will unveil later today, will repeal the GSEs’ charters, permanently ending their monopoly, and transition to a system that allows qualified mortgages backed by an approved private credit enhancer with regulated, diversified capital resources to access the explicit, full government securitization guarantee provided by Ginnie Mae. I believe the plan will preserve much of what is demanded in the current system: liquidity, the TBA market, and the 30-year pre-payable fixed mortgage. And it will do so while dispersing risk and leveling the playing field for all entrants into mortgage finance.
Hensarling describes the plan as a “grand bargain” that is not his preferred outcome but said that it might be the plan to save the housing market from a future collapse.
“While by no means perfect, we offer this proposal as a grand bargain on how to move past an increasingly dangerous status quo: codify an explicit government MBS guarantee into law, coupled with an accountable and effective affordability program in exchange for placing the taxpayer in a catastrophic loss position only diffusing the credit risk beyond two GSEs, and creating market competition,” Hensarling said.
“The grand bargain I have described does not necessarily represent my preferred policy or optimal policy, but I believe it represents an achievable policy and a good faith effort at bipartisan compromise,” Hensarling said. “A decade without GSE reform has once again put homeowners, taxpayers, and the economy at risk. The time to act is now.”
The bill itself contains numerous sweeping reforms to the housing finance system, including separating Ginnie Mae from the Department of Housing and Urban Development and making it the primary government backer of all mortgages.
The bill would see Ginnie Mae create a program called “Ginnie Mae Plus,” which would “provide borrowers access to conventional home loans by guaranteeing payment to investors of securities backed by eligible conventional mortgages and protected with private capital.”
That private capital would be in the form of “private credit enhancement,” which Ginnie Mae issuers would be required to purchase in order to have their loans included in eligible mortgage-backed securities.
Additionally, the bill would eliminate the 3% down mortgage programs of Fannie Mae and Freddie Mac, requiring borrowers to put down at least 5% to get a government-backed mortgage.
Perhaps most notable of all in the bill is the fact that it calls for the repeal of the GSEs’ government charters.
The bill would require the Federal Housing Finance Agency to permanently repeal the GSEs’ charters within five years of the bill becoming law. The FHFA would also be required to “eliminate any statutory advantages and privileges conveyed by those charters on Fannie Mae and Freddie Mac as corporate entities.”
Additionally, “no later than the termination of the charters,” the FHFA would be directed to take the GSEs into receivership to begin winding down their legacy business.
The bill would then allow the “successors” to the GSEs to apply with the FHFA to serve as “private credit enhancers” or Ginnie Mae-approved issuers.
As part of that wind-down, the government would take over the GSEs’ Common Securitization Platform, the coming joint delivery system for the Single GSE Security that’s scheduled for use in 2019.
The bill would establish a new “non-government, not-for-profit Mortgage Security Market Exchange” that would develop “best practices” standards for the private securitizing, pooling, and servicing of mortgages, as well as operating a “publicly accessible securitization outlet to match loan originators with investors.”
According to a summary of the bill, the bill “transforms the Common Securitization Platform from a proprietary secondary market access point jointly owned by Fannie Mae and Freddie Mac and built only for their benefit, to an open market utility operated by the Exchange.”
But that’s really just the tip of the iceberg of the Bipartisan Housing Finance Reform Act’s changes.
“Ten years after the financial crisis, our housing finance system remains broken. There’s still too much entity risk, not enough affordability, and we haven’t taken comprehensive action to make the system safer for taxpayers long-term," Delaney said in a statement.
"It’s imperative we deliver a solution and this discussion draft is a bipartisan blueprint for how we can substantially increase our investment in affordable housing, make the housing finance system more stable, protect the thirty-year fixed-rate mortgage, and preserve the successful GSE multi-family business,” Delaney continued. “The American Dream really depends upon access to affordable housing and a workable and secure housing finance system. I thank Chairman Hensarling for working with Congressman Himes and me on this draft and I look forward to hearing from stakeholders and constituents so we can continue to move forward on a solution.”
The bill was welcomed cautiously by both the National Association of Realtors and the National Association of Federally-Insured Credit Unions.
“We support the overarching goal of Chairman Hensarling and Rep. Delaney’s GSE reform draft to create an equal playing field in the single-family mortgage market,” NAFCU President and CEO Dan Berger said in a statement. “As Congress gears up for housing finance reform and considers this legislation and other approaches, it is important that vibrant competition remains throughout the system and that credit unions maintain unfettered access to the secondary mortgage market and fair pricing based on loan quality, not quantity.”
Himes called the legislation a “vital piece of reform” and said that it will help all involved in the housing finance system.
“I’m proud to join Chairman Hensarling and Representative Delaney in promoting this vital piece of reform. This bipartisan discussion draft ensures that new homeowners will have access to the affordable, predictable financing options they need, makes access to affordable housing a priority, and shields taxpayers and our economy from future housing-related downturns,” Himes said. “This draft brings together market efficiency in pricing risk with government's ability to provide scale to create a safer, more liquid housing market that preserves access to affordable housing for American families.”
National Association of Realtors President Elizabeth Mendenhall shared similar sentiments.
“After years of discussions with Chairman Hensarling and his staff, the Realtors are pleased to see the Chairman now support a federal role in the conventional housing finance system. An explicit government guarantee will protect consumers by stabilizing prices and helping to ensure the market is supported during times of economic distress – critical elements that should be the bedrock of any reformed housing finance system,” Mendenhall said.
“Ultimately, the Chairman’s proposal moves this discussion forward, marking a notable, important shift to a Ginnie Mae model that operates on a smaller, more nuanced scale,” Mendenhall added. “The National Association of Realtors looks forward to working with the Chairman and this committee to address issues that may arise with this model, including limited credit availability and regional pricing variation.”
[Update: This article is updated with statements from Reps. Delaney and Himes.]